Paso Robles home loan expert cautions on new rules for 2014

Effective January 2014, changes in lending requirements issued by the Consumer Financial Protection Bureau will require the mortgage industry to comply with new servicing rules intended to protect the consumer. But will it be a law of unintended consequences?

With new regulations and guidelines for the mortgage industry taking effect in January 2014, Steve Allen, Loan Officer with Connect Home Loans, a Paso Robles mortgage broker, is focused on several issues: What the requirements will be, how they can be implemented in time and how they’ll affect his clients. As part of the Dodd-Frank Act of 2010, the changes issued by the Consumer Financial Protection Bureau (CFPB) will bring about a slew of new mortgage servicing rules that address a borrower’s ability to repay, what constitutes as a ‘qualified mortgage,’ and protections for high-cost mortgages. As a 25-year veteran of the lending industry in Paso Robles, Allen believes that implementation of these new requirements will become one of the most difficult challenges his industry has ever undertaken.“When you have a massive amount of regulation coming out at one time, in any industry, there’s usually a lull where everybody tries to figure out how to make it work,” explained Allen. He cautions that compliance may produce a slow-down in lending for at least the first half of 2014.

In the years leading up to the market crash of 2008, Allen says the mortgage lending industry was really just a free-for-all. “There weren’t that many professionals in the business and, for a multitude of reasons, a lot of things had snowballed; interest rates had dropped and guidelines had become so flexible because property values were skyrocketing,” he said. “Nobody felt the need to police things well and it basically got out of hand to a point where collapse was inevitable.” However, in an effort from the government to swing the pendulum the other way, Allen feels the new, wide-sweeping regulations may end up squeezing out the smaller consumer.

For example, beginning in January 2014 a very narrow set of guidelines will be instituted for so-called ‘qualified mortgages,’ or QMs. Lenders of these loans will enjoy certain legal protections from future litigation. “Pretty much most of the industry including Fannie Mae and Freddie Mac have all said that come January they’re only buying QM loans,” explained Allen. Qualifying for a QM loan requires a lower debt to income ratio. Currently, conventional loans require a maximum debt to income ratio of 45%, with FHA a little higher. When the new requirements take effect the ratio will likely be capped at 43%, across the board. “Today, if you were to put that rule in place, fully half of the people who are out there in the pipeline buying houses and getting loans would be removed,” Allen said. Additionally, costs associated with a mortgage will go up including appraisal fees.

On the up side, Allen believes that people will have to take a step back and perhaps buy less house to qualify for a QM, leading to lower housing prices in the future. “We should not see prices increasing the way they are,” Allen said. “They should be increasing about 2-5% a year, at most. Last year they increased 20% simply because of a lack of inventory.” Homeowner hopefuls who don’t qualify for a QM could be pushed into a non-qualified mortgage loan, creating a whole new market much like sub-prime loans. As Allen explains, “If you’re going to provide someone with a non-qualified mortgage, their interest rates are probably going to be a little higher, and the costs and fees are certainly going to be a higher in order to make it work.”

In dealing with these new regulations, Allen predicts that there will be a period of disruption as everyone tries to adjust and understand the rules, implement them and gauge the impact on the consumer and the lending industry. His advice? Although it’s a competitive market, now is the time to buy. See your lender and get the process started to purchase a new home before the end of 2013. Waiting for 2014 could greatly diminish your ability to qualify and buy, in the short term.